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Executives

Jim Rowe - Director of Investor Relations

Timothy J. Sloan - Chief Financial Officer and Senior Executive Vice President

John G. Stumpf - Chairman, Chief Executive Officer and President

Analysts

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Edward R. Najarian - ISI Group Inc., Research Division

Frederick Cannon - Keefe, Bruyette, & Woods, Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Wells Fargo & (WFC) Q4 2011 Earnings Call January 17, 2012 9:30 AM ET

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note that today's call is being recorded. I would now like to turn the call over to Jim Rowe, Director of Investor Relations. Mr. Rowe, you may begin your conference.

Jim Rowe

Thank you, Regina. Good morning, everyone. Thank you for joining our call today, during which our Chairman and CEO, John Stumpf; and our CFO, Tim Sloan, will review fourth quarter results and answer your questions.

Before we get started, I would like to remind you that our fourth quarter earnings release and quarterly supplement are available on our website. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement.

Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website at wellsfargo.com.

I will now turn the call over to our Chairman and CEO, John Stumpf.

John G. Stumpf

Thank you, Jim. Good morning. Happy new year, and thanks for joining us today. A year ago, we were excited about all the opportunities we had ahead of us, even in a challenging economic environment, and I couldn't be more pleased with all that we accomplished in 2011. We earned a record $15.9 billion, up 28% from 2010. We grew deposits by $72 billion, up 9%. We grew loans by $12 billion and grew our core loan portfolio by $33 billion. We achieved record retail banking cross-sell of 5.9 products per household. We improved credit quality with net charge-offs down 36% from a year ago. We began our expense initiative and remained focus on our target of $11 billion in noninterest expense in the fourth quarter of this year, 2012. We grew ROA by 24 basis points and increased ROE by 160 basis points. And we remain committed to helping homeowners stay in their homes, with over 720,000 active or completed loan modifications initiated since the beginning of 2009.

We also increased capital levels while providing shareholders with a higher return on their investment by increasing our dividend and repurchasing 86 million shares of common stock. We also redeemed $9.2 billion of high-cost trust preferred securities. We accomplished all of this while completing the conversion of Wachovia's retail banking stores, the largest conversion in banking history. Our 6,239 retail banking stores are now on a single platform, serving customers coast to coast. In most mergers in financial services, customer service typically declines, but our team members remain committed to providing outstanding customer service as reflected in Wells Fargo, once again, ranking #1 in customer satisfaction among large banks based on a national survey.

2011 was a remarkable year, but I'm even more excited about the opportunities that lie ahead as we enter 2012 as One Wells Fargo. We have submitted our board-approved capital plan to the Fed, and we are focused on returning even more capital to our shareholders. We remain focused on better serving our existing customers and welcoming new customers as we grow market share, both organically and through acquisitions. And we remain committed to strengthening the overall economy by lending to our business customers to fund growth and create jobs, by helping homeowners stay in their homes through participating in Home Preservation Workshops and loan modifications and by being active volunteers in the communities where we live and where we work. The vision -- this vision has guided us for decades, meeting our customers' financial needs, will continue to drive our growth in the year ahead.

Let me now turn this over to Tim Sloan for more detail on our financial results. Tim?

Timothy J. Sloan

Thanks, John, and good morning, everyone. My remarks will follow the presentation included in the first half of the quarterly supplement starting on Page 2. John and I will then take your questions.

As John highlighted, we achieved outstanding results in 2011, including a very strong fourth quarter. We generated record earnings of $4.1 billion, up 1% from the third quarter and up 20% from a year ago. Earnings per share were a record $0.73, also up 1% from last quarter and 20% from a year ago. This is the eighth consecutive quarter of EPS growth. In fact, by almost any measure, our results in the fourth quarter moved in the right direction, demonstrating the underlying strength of our diversified franchise. We had linked quarter growth in revenue with growth in both net interest income and noninterest income. We had higher pretax pre-provision profits, loans, deposits and securities available for sale. We also had strong credit quality, and our capital levels continue to grow.

On Page 3, we highlight our continued strong diversification, which is a major differentiator for Wells Fargo and is a key driver of our ability to generate growth over time and through various economic cycles and interest rate environments. Let me start with a few highlights of the drivers behind our balance sheet and income statement growth, and I'll add more detail later in my remarks.

Starting with the balance sheet. We generated strong loan growth this quarter with loans up $9.5 billion. Our core loan portfolio, which excludes the planned runoff from the liquidating portfolio, was up $13.7 billion from the third quarter. We, once again, purchased securities this quarter with balances up $15.4 billion from the third quarter as we continue to redeploy cash. We also generated strong deposit growth with balances up $24.6 billion.

Now let's turn to the income statement. Revenue grew by 5% from the third quarter, driven by strong loan growth and deposit growth, as well as fee growth throughout our diversified businesses. Expenses increased as expected in the fourth quarter, but we are still targeting $11 billion in noninterest expense in the fourth quarter of 2012.

Let me now cover our results in more detail. As shown on Page 6, period-end loans were up $9.5 billion from the third quarter, our third consecutive quarter of loan growth, while we continue to reduce the size of our liquidating portfolio. Excluding the runoff of $4.2 billion of liquidating loans, our core loans grew by $13.7 billion, including organic loan growth of $6 billion.

Commercial loans grew $5.6 billion, driven by portfolio acquisitions, new loans and new customer activity. Loan growth in the fourth quarter included the purchase of $2.1 billion of U.S.-based commercial real estate loans. We have purchased several portfolios over the past few quarters, which reflect our ability to capitalize in the opportunities generated in this business environment and provide attractive returns for our shareholders. While we have -- while we already have relationships with many of these customers, these portfolio purchases also provide us with new customers that we hope to do more business with in the future.

Consumer loans also grew this quarter, up $3.9 billion from the third quarter, driven by the reconsolidation of $5.6 billion of reverse mortgage loans and was reduced by the runoff of $3.6 billion of liquidating consumer loans. We had loan growth in our core auto portfolio. Our credit card portfolio growth reflected strong account growth and seasonality. We believe we're well positioned to grow loans organically and through acquisitions, and we expect loan growth to continue.

We also continue to generate strong deposit growth, with average deposits up $29.5 billion from the third quarter and up $74 billion or 9% from a year ago. Average core checking and savings deposits grew $30.9 billion or 4% from the third quarter and were up 12% from a year ago. Consumer checking accounts were up 3.2% from a year ago. We achieved this growth while continuing to bring down our deposit cost, which were 22 basis points in the fourth quarter, down 3 basis points from the third quarter and down 9 basis points from a year ago. We have grown deposits while reducing our deposit cost for 5 consecutive quarters.

Tax equivalent net interest income increased $369 million from the third quarter, benefiting from a $24 billion increase in average earning assets and a 5 basis point increase in net interest margin. Earning asset growth this quarter was broad based, with increases in loans, securities and mortgages held for sale. We funded the growth in these assets by continuing to successfully attract low-cost deposits and by reducing cash and other short-term investments.

The balance sheet continue to reprice in this low-rate environment but we were able to offset that through pricing discipline, including a 4 -basis point decline in interest-bearing deposit cost and reducing long-term debt by $10 billion in the fourth quarter.

Noninterest income increased $627 million from the third quarter or 7%. This growth was driven by an increase in mortgage banking revenue of $531 million, up 29% from the third quarter, driven by higher margins and strong originations. Originations increased $31 billion or 35% from the third quarter. The unclosed mortgage pipeline remained very strong at $72 billion at quarter end. Trading, debt and equity gains were up $337 million from the third quarter. Linked quarter growth in trading gains benefited from $275 million of higher deferred compensation plan investment results, which is offset in expense, and stronger core customer accommodation trading. The linked quarter comparison also benefits because you recall that the third quarter included a loss from resolving one legacy Wachovia position. Noninterest income also benefited from $153 million gain on the sale of H.D. Vest in the fourth quarter.

Credit card fees were down $333 million from the third quarter, reflecting the first quarter of lower debit interchange fees, which reduced debit card fees by $365 million in the fourth quarter. Card fees benefited this quarter from strong growth in consumer credit cards, with new account growth up 6% from the third quarter and up 90% from the fourth quarter of 2010, driven by very strong growth in the east.

Noninterest expense increased 7% from the third quarter. We highlighted on the call last quarter that we expected expenses to increase in the fourth quarter. Let me walk you through the drivers of the increase on Slide 11.

Third quarter expenses included a $210 million benefit due to lower deferred compensation expenses, and the fourth quarter had a net deferred compensation expense of $56 million. These 2 amounts increased fourth quarter expenses by $266 million compared to the third quarter. After adjusting for this amount, the remaining increase in expenses were driven by 3 primary factors. First, mortgage and capital markets personnel expense increased approximately $300 million, driven by higher revenue in the third -- in the quarter, which is largely reflected in higher incentive compensation. Secondly, we have seasonally higher equipment cost and higher foreclosed asset expense. Combined, these increased expenses by approximately $200 million. Finally, we had approximately $100 million of higher cost associated with the mortgage servicing regulatory consent order.

We currently expect first quarter expenses to remain elevated, driven by seasonally higher comp and benefit expenses and, our final quarter, Wachovia integration expenses, but partially offset by continued gains from our expense initiatives. In the second quarter of 2012, we expect expenses will decline by $500 million to $700 million from the first quarter, driven by the elimination of merger expenses and lower comp and benefit expenses, which as I just mentioned, will be seasonally higher in the first quarter.

Our expenses in 2012 will reflect the benefit from our expense initiative, and we continue to target noninterest expenses declining to $11 billion in the fourth quarter of 2012. We expect to capture most of the savings through the consolidation of consumer lending businesses, combining staff functions and technology groups, moderation of cyclically high mortgage costs, including loss remediation and simplifying customer interaction to improve service and efficiencies.

Turning briefly to our segment results starting on Page 13. Community Banking earned $2.5 billion, up 8% from the third quarter, driven by stronger mortgage banking revenue. Sales trends remain strong. Core product sales in the West were $7.6 million, up 9% from the prior year, and core product sales in the East continue to grow by double digits. Retail Banking cross-sell continue to grow to a record 5.92 products per household, up from 5.7 a year ago. And while cross-sell in the East continue to grow to 5.43, there is still plenty of opportunity to further increase cross-sell to the 6.29 products per household in the West.

Wholesale Banking earned $1.6 billion, down $172 million from the third quarter, reflecting lower loan loss reserve release. Revenue increased 5% from the third quarter as many businesses, including commercial real estate, banking, government banking and international, generated strong loan and deposit growth, and fixed income sales and trading and investment banking results benefited from improved market conditions. Wholesale Banking continued to generate strong broad-based loan growth from both new and existing customers, with average loans up $11.4 billion or 4% from the third quarter. This growth reflects the purchase of $2.1 billion of U.S.-based commercial real estate loans, as well as growth across from all portfolios, including: commercial banking, which has grown loan for 17 consecutive months; international; commercial real estate; capital finance; asset-backed finance; government banking; and corporate banking. Average core deposits increased $14 billion from the third quarter, up 7% and are up $38 billion or 21% from a year ago. Wholesale Banking businesses continue to increase market share, including our investment banking market share growing from 4.2% in 2010 to 5.1% in 2011.

Wealth, Brokerage and Retirement earned $325 million, up 12% from the third quarter. This growth was driven by a 6% increase in revenue. Revenue benefited from the $153 million gain on the sale of H.D. Vest and $59 million of deferred compensation plan investment gains compared to $128 million loss in the third quarter. Excluding these items, revenue was down 5% on lower asset-based fees, retail brokerage transaction revenue and securities gains. Average core deposits increased $3.2 billion, up 2% from the third quarter, reflecting both the flight to quality and our continued success in attracting client assets, including deposits. Managed account assets were up 7% from the third quarter, driven by strong net inflows. Since managed account asset fees are priced on a quarterly lag, first quarter revenue will benefit from the improved fourth quarter markets. Our continued focus on meeting our customers' financial needs is reflected in achieving a record cross-sell of over 10 products per WBR household.

Our credit quality remains strong in the quarter as shown on Page 16. Net charge-offs were stable from the third quarter and down 51% from the peak in the fourth quarter of 2009. We remain pleased with how our loan portfolios are performing, and we expect them to continue to improve in 2012. Reflecting our continued improvement in credit quality, we had a $600 million reserve release in the fourth quarter. Absent a significant deterioration in the economy, we continue to expect future reserve releases in 2012.

Nonperforming assets continue to decline, down $879 million from the third quarter, reflecting a $596 million decline in nonaccrual loans driven by a lower commercial real estate non-accruals and a $283 million decrease in foreclosed assets. Loans 90 days or more past due were up modestly, $119 million, while early stage retail delinquency balances were stable, with rates up modestly on lower loan balances.

On Page 18, we highlight what we believe our mortgage servicing portfolio is the best in the industry. The majority of our $1.8 trillion residential servicing portfolio, or 69%, is serviced through the agencies. Our private securitizations where we originated the loans are very -- are a very low portion of our total portfolio.

Reflecting the quality of our portfolio, our delinquency and foreclosure rate was over 400 basis points lower than the industry average, excluding Wells Fargo, based on the most recent publicly available data. Our total delinquency and foreclosure rate was 7.96% in the fourth quarter, down from a peak of 8.96% in the fourth quarter of 2009 but up modestly from the third quarter due to seasonality. Total repurchase demands were stable compared to the third quarter and went down approximately 31% from a year ago.

As shown on Page 20, our capital position continue to improve, with our Tier 1 common equity ratio increasing to 9.46% and our estimated Tier 1 common equity ratio under current Basel III proposals growing to 7.49%. We redeemed $5.8 billion of trust preferred securities in the fourth quarter, with a weighted average coupon of 8.42%. We purchased 26.6 million shares in the fourth quarter and an additional estimated 5.6 million shares through a full repurchase transaction that will settle in the first quarter of 2012. As John mentioned at the beginning of the call, we submitted our capital plan earlier this month, and we expect to response no later than March 15. We have a great story to tell, reflecting the performance of our diversified model and the strength of our balance sheet. We remain focused on returning more capital to our shareholders as we continue to grow our capital levels.

In summary, our strong fourth quarter and full year 2011 results reflected the benefit of our diversified model, which provides us with many opportunities for growth. In the fourth quarter, we grew earnings, revenue, loans, deposits and capital with strong contributions throughout our consumer and commercial businesses. As we begin the new year, we're encouraged by the signs the U.S. economy is doing better, and we believe Wells Fargo is in a unique position to further benefit from the opportunities that drove a record performance in 2011.

I will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matt O'Connor with Deutsche Bank.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

If I could just focus on the net interest margin percent and net interest income dollars to start. Last quarter, the market was disappointed in the NIM percent, specifically. You guys probably had one of the worst NIMs last quarter. It seems like this quarter, you'll probably have one of the best ones. And I appreciate there's a lot of moving pieces. But as you look forward, maybe you can give some insight on how you think the NIM percent and the net interest income dollars will trend from here and if we can expect similar volatility to what we've seen.

John G. Stumpf

Matt, you focused on the fact that it's difficult to look at the NIM on a quarterly basis and there can be some volatility quarter-to-quarter, so I don't want to provide any specific guidance on the NIM. But as we've said, generally, we think that the NIM is trending down a bit given that the -- that rates are lower. However, as you pointed out, our net interest income was up, and the reason that net interest income was up was because we were able to grow loans and continue to invest in high-quality securities.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

And I guess as a follow-up on that, as I think about the loans that are running off and the loans that you're purchasing, they're starting to converge a little bit in terms of magnitude, meaning just the runoff is less of a drag from -- or so far. Now going forward, there have obviously been some portfolios in the news since speculation of you bidding on some, but what do you think the opportunity is for additional loan purchases from here? And maybe some comment on how those yields compared to what's running off.

John G. Stumpf

Matt, we are taking lots of tires. We are in a unique position that we're not capital constrained. We can do things that make good sense for us economically for our stockholders. As you know, and you know, Wells Fargo well, we are cautious. It have to make a lot of sense for us. And if all we get out of this is sore toes, that's fine also, but there -- because we don't have to do something. But the deals we've done so far, we like a lot. It brings customers. It brings earning assets. And of course, we're not going to do these things unless they're good economically for us. So that's just one of the opportunities we have going forward, and I suspect we'll see more things. And again, if we do some, they'll be done at the right way. If we don't do any, that's also fine.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

And how did the yields compare? You show us the runoff portfolio yields, but how about the loans that you're purchasing and might be looking at. How do those yields compared to what's running off?

John G. Stumpf

Well, there -- these are attractive IRRs. We wouldn't do them unless that'd be the case.

Operator

The next question comes from the line of John McDonald with Sanford Bernstein.

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

One follow-up on Matt's question on liquidity. Tim, maybe just a little bit of color of what led you to deploy liquidity this quarter and into what did you deploy that. And do you still feel like you're sitting on excess liquidity? And what will drive the pace at which you further deploy the liquidity you have?

Timothy J. Sloan

Sure. As you know, the first call on our liquidity at any time is going to be for loans. And we had good loan growth this quarter both organically and through acquisitions, which we're excited about. When you look at our investments in the securities portfolio, there really weren't a whole lot different than what we looked at in the third quarter. The timing was a little bit different, because you recall, in the third quarter, there was a lot of volatility that occurred in a good portion of the third quarter. So we invested, more or less, ratably across the quarter, which is a good thing. We really didn't change the complexion of the securities portfolio. We continue to invest in high-quality assets across duration -- the duration of the portfolio didn't significant change. As to your last question about capacity, one of the great things about the company is that we're continuing to grow deposits. And we feel like we've got -- have more than ample liquidity to continue to grow and service our existing customers, maybe look at some acquisitions, as John mentioned, and continue to invest in the securities portfolio.

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then on expenses. Can you talk a little bit more color about the drivers of the decline that you expect in the second quarter? Specifically, first, the merger integration expenses will stop in the second quarter, will those stop for good? And then also in the personnel decline that you're talking about in the second quarter, is that seasonal, the mortgage banking, or is this some of the consolidation of functions that you're doing? Can you give a little more color there?

Timothy J. Sloan

Sure. So if you go back to Slide 11, I think that the first -- I'm sorry, Slide 12. The first part of the question relates to the integration, and the integration expenses will be over in the first quarter. So we won't be talking about them again after first quarter. So that's number one. Number two, the incentive compensation and expenses and employee comp in the first quarter is more seasonal. It's not necessarily cyclical. It's not necessarily tied to any business. It's just in the first quarter, you tend to have more incentive comp and in terms of when you recognize it, as well as the fact that you might recognize payroll taxes at a higher rate in the first quarter.

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And if you're going to walk us down from second quarter down to the fourth quarter, where you hope to get to $11 billion, the drivers of that would be the other things on this table on Page 12?

Timothy J. Sloan

Correct. And again, to reiterate, we feel good about being able to see the expenses decline from the first to the second quarter by $500 million to $700 million, which takes us a long way to get to that $11 billion.

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And the last thing for me is on share repurchases. The forward contract that you entered for the first quarter of $5.6 million, is that the entirety of what you're approved for this quarter? Or you have approval to do additional open market purchases in the first quarter beyond that?

Timothy J. Sloan

Yes. Matt, I'm not going to comment on any specifics of the capital plan from last year, as well as what we submitted for this year.

John E. McDonald - Sanford C. Bernstein & Co., LLC., Research Division

Okay, okay. You just said that you hope to do more in 2012. I guess you said that already, Tim.

John G. Stumpf

That's correct. Yes, more is more as I said before. And our shareholders have been very patient, and we'll have to just wait until the 15th of March.

Operator

The next question comes from the line of Erika Penala with Bank of America Merrill Lynch.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Could you give us a sense of what you think on the -- in terms of mitigating some of the Durbin headwind, on what you could accomplish with regards to implementing deposit fees in 2012?

John G. Stumpf

Well, Erika, we have talked a lot about the fact that, in most cases, our customers pay for all the convenience we offer them through more products and services with us, and that's always been the case around here. And in fact, if you look at the hit we took in the fourth quarter, now that the debit interchange number is all through that, it was actually a little less than the $2.50 after tax that we have talked about because we're doing more business. And we actually have more accounts now. So -- but we're always looking at ways to tighten our belt, offer more value, look at ways that customers how they want to pay us for the services we provide, and that's an ongoing process.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Okay. And I hear the message loud and clear, in terms of not answering any questions about what was submitted to the regulators with regard to your capital plan. But I have a timing question. I'm wondering if there are opportunities that are more sizable for M&A that could be coming out of Europe or even in the U.S. Does the fact that you're not going to get an answer from the Fed until March 15 deter you from doing anything between now and then?

John G. Stumpf

There was some background noise during the question, so people put their phones on mute. That would be great while they're not speaking. But anyway, we have -- as I mentioned, we continue to kick tires. We're looking at things, and we'll do that. We're doing that continuously. But again, we're cautious. We don't had to do anything. If we do something, it will be a bolt-on business or it'd be an add to something we're doing right now, either in terms of capability or capacity or new customers. And that'll continue even during this process.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

But just to follow-up and clarify. The fact that the capital plan is outstanding for approval doesn't impact your ability to make an announcement before March 15, in terms of any M&A.

Timothy J. Sloan

No, it doesn't.

John G. Stumpf

No, it does not.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Real quick on the -- it looks like you grew your residential loans by $6 billion, looking at the average balance sheet. If I'm incorrect, can you tell me what did you grow it by? And if you did, was that a change of policy? It's the first time we've seen some material growth in that residential portfolios.

Timothy J. Sloan

Well, Paul, we did reconsolidate $5.6 billion of reverse mortgages that we have previously sold, based upon some clarifying guidance that SEC provided to the entire industry. So that was the primary driver for the growth in the residential loan line this quarter.

John G. Stumpf

The economics stay the same, Paul, but that -- it's more of an accounting.

Timothy J. Sloan

We earn a servicing fee that loans continue to be insured by the FHA, so it was more of accounting transaction than anything.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Okay, okay. And real quick on the HAMP program that was announced over the quarter, do you think that's going to be material? Are you guys at all, or do you think there's still too many roadblocks for that program to have any impact at all in the mortgage market? Not the HAMP part, the HARP.

John G. Stumpf

Yes. You're talking about the HARP 2?

Paul J. Miller - FBR Capital Markets & Co., Research Division

Yes, HARP 2.

John G. Stumpf

Yes, there's going to be some customers, and we're ramping up. We're going to be helping them, and it's hard to say today how many and so forth. But we're eager to help customers who have 7% and 8% coupons refinanced down to 4%, notwithstanding their loan-to-value issue, which has been the issue. But again, it's hard for me to predict how big that will be. Incidentally with HARP 1, we've been doing a lot of those. This is -- kind of takes it above the 1.25 or whatever the number is. So we'll catch up to you in there, but I don't -- this is not going to be a refinance boom equal to 2003, for example. I mean, a lot of -- there's been a lot of refinancing going on. But there are some customers there, and we're eager to help them.

Timothy J. Sloan

Yes. Paul, I think the administration set an expectation of about 1 million mortgages as part of this program, and that seems about right to us.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then we've seen a lot of turmoil come out of Fannie and Freddie recently, a lot of a political fallout from their high salary. We just saw Williams just stepped down. Are you seeing -- I mean, is -- do you -- how -- do you think it is a negative for Fannie and Freddie going forward, or you don't think it's really -- it's business as usual out there?

John G. Stumpf

Well, I don't know that I focus on that. I mean, we're focused on helping customers. And whatever happens with Fannie and Freddie, I mean, we're getting support and approvals that we need. Of course, you know there's been a small increase in the GPs. That probably affects things more than what's happening at Fannie and Freddie's management levels.

Operator

Our next question comes from the line of Ed Najarian with ISI Group.

Edward R. Najarian - ISI Group Inc., Research Division

Yes, just 2 quick questions. Tim, I appreciate no sort of forecast for the net interest margin, but do you mind going over some of the big pieces that you see in terms of your ongoing ability to reduce funding cost, like more TRUPs redemptions, long-term debt, lower deposit cost? Could you just sort of remind us how you sort of think about the opportunity remain?

Timothy J. Sloan

Well, let's -- sure. Let's start in reverse order. I think, first, on lower deposit costs. I mean, the team has done a terrific job over the last couple years of reducing deposit costs. And given where rates are today, we think that there's still more room to reduce deposit cost. Specifically what that -- the number is, I don't know on a quarterly basis. But if you've seen the last couple of quarters, it's been pretty consistent. And so we're optimistic that we'll continue to make progress even as we grow deposits, which is pretty important. I think if we were reducing deposit across and not growing deposits, that would probably not be a good thing. In terms of the TRUPs, we had a -- or we called about 7 -- or we have about $7.5 billion that are still outstanding and $2.7 billion have a call date in 2012, right. Beyond that, I don't want to provide any specific guidance about the TRUPs. That's part of our capital plan submission, so we'll leave it at that. In terms of long-term debt, we think that we've done a nice job of reducing overall debt. I think, over time, in our overall debt over the last 3 years, I think it's down 53%, which is really good results. But I think, over time, you'll probably see us be a little bit more active in the market as opposed to continuing to decrease long-term debt. But I do think, given where rates and spreads are, that we can reduce our overall debt cost even if we do have to raise some debt in the future.

Edward R. Najarian - ISI Group Inc., Research Division

Okay. And then is there a portion of noninterest-bearing deposits that we should think about maybe going away in 2012 because of escrow deposits related to the very strong mortgage origination quarter?

Timothy J. Sloan

Well, escrow deposits were up, I think, slightly. Actually, I can't recall the specific number off the top of my head...

John G. Stumpf

Around $35 billion.

Timothy J. Sloan

But they were up a bit. And that's really reflective of what's going on in the mortgage market. Certainly, if the mortgage market continues to be a strong as it is right now, they'll be the same as the mortgage market comes down a bit. Escrows will be down. But those are the only deposits I will look at as being concerned about, non-interest-bearing deposits being concerned about moving away based upon what's going on in the economy.

Edward R. Najarian - ISI Group Inc., Research Division

Okay. And then finally, sort of mixed trends on the linked quarter credit quality improvement. We saw delinquencies tick up a bit. Could you put a little more color around your thoughts? You mentioned that you thought you expected more reserve release in 2012. I don't really expect you to quantify that but maybe that thought in conjunction with sort of the trends we saw in credit metrics this quarter.

Timothy J. Sloan

Yes. That's a fair question. Overall, we were very pleased with credit. We continue to have very strong credit. Where we are right now is consistent with the expectations that we've been talking about for the last couple of quarters and consistent with what we're seeing at this part of the credit cycle. NPAs were down almost $900 million on a link quarter basis. That was very nice progress. Charge-offs were stable. Retail delinquencies, 30-plus delinquencies, were normally up and in the fourth quarter due to seasonality and they were stable this quarter, so we're pleased about that. It's an item that we've all forgotten about but our PCI loans continue to perform better than what our expectations. Now almost $4 billion better than our original projections and that we still have 27.5% coverage in terms of the non-accretable on the PCI. So we continue to feel good on credit. Our expectation is that credit will continue to improve throughout this year. It's not going to improve at the same -- we don't think it will improve at the same rate as what we saw over the last couple of years but we'll continue to see improvement. And again, as you mentioned and I'll reiterate it, I think the fact of the matter is that our loan loss reserve release are likely to continue this year.

Operator

Our next question comes from the line of Todd Hagerman with Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Just a follow-up on the last question. Just how should we -- Tim, with your outlook on credit and again, just you look at the kind of the stabilizing trends that we've seen in the last couple of quarters, if I think about the loan loss release and your expectations, how is the housing market kind of factored into the equation and the consumer in particular as you guys look out the next 12 to 18 months?

Timothy J. Sloan

Well, the housing market clearly is factored into how we think about our loan loss reserve. And to the extent that the housing market gets better, that's a good thing; if it gets worse, it's a bad thing. But the primary driver in terms of consumer delinquencies and losses is jobs. That's the primary focus from our perspective in terms of the portfolio. But again, at this point in the cycle, where we've had a lot of improvement and the economy is growing but growing very slowly, it's not a surprise that we've seen a couple of quarters of reduced improvement. But remember, even in this quarter, our consumer losses were down, which we're pretty pleased with.

John G. Stumpf

Yes, and think of it this way. Since 2008, underwriting in some of these portfolios have changed. So all of a sudden, you have 8 and 9 and 10 and 11, that becomes a more substantial part of your portfolio. And if you look at our delinquencies on residential real estate and you look at how well we're doing in commercial, I couldn't be happy with our progress on credit.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

I guess, what I'm getting at is just in terms of the embedded reserve and granted your coverage ratios are very strong. But I guess what I'm driving at is kind of the embedded or assumptions in terms of home price decline, unemployment, that sort of thing in terms of, as you factor into your outlook on credit.

John G. Stumpf

Well, that's all factored in there. I mean, we look at that. We consider that. We obviously have a -- we stressed these portfolios and we look at indicators. And as Tim mentioned, on the consumer side, where you typically see a seasonal run-up in consumer delinquency, we didn't. So that bodes well for the future.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay. And then if I could just real quickly switching gears, just on the mortgage side. The reps and warranties cost ticked up a little bit in the quarter. Can you just talk about kind of just, again, the trends that you're seeing? Is that something that should be, is it going to be fairly lumpy? Is it something specific more with Fannie versus Freddie in the quarter in terms of the earlier stage delinquency buckets, if you would? Just kind of trying to get a gauge on what your expectations, what happened in the quarter?

Timothy J. Sloan

Actually, the fourth quarter results in terms of the mortgage repurchase reserve were pretty stable. Total demands outstanding both in terms of the number and the balance were stable in the fourth quarter and recall they're down over 30% from the prior year. The new demands that we saw for the '06 to '08 vintages are still up as John said, that was the vintages that are most problematic. But again for us, relative to the rest of the industry, it's less than an issue. But they were up for Fannie, that's been consistent now for about 3 quarters. Freddie was still within our expectations. But again, it's important to note that our realized losses were $272 million, which were down in the fourth quarter from $384 million in the third quarter.

Operator

Our next question comes from the line of Brian Foran with Nomura.

Brian Foran - Nomura Securities Co. Ltd., Research Division

On the FHA insured loans that are 90 days more past due and still accruing, I recognize the risk really is on your balance sheet but can you just talk about the trends? They seem to be bouncing around between $14 billion and $15 billion up until the middle of this year, and then there's been a pretty significant ramp over the past 6 months. Is that timing or is that deterioration of FHA loans overall? And as a follow-up, is there any signs that there could be risk to the banking industry of the FHA potentially putting some of these losses to the banks?

Timothy J. Sloan

Well, let me jump on the first part of your question and I'll let John answer the last. I think that what you're seeing is the fact that we're a very large mortgage lender in this country and that our volumes are up and our market share is up. So it's understandable that because our FHA/VA origination volume has increased since the end of 2008, that there's going to be a natural increase in delinquency. If you look at the performance of these mortgages relative to what we've seen in history, they're not performing any, they're actually performing better than what we've seen historically, it's just that we're a bigger lender. And as you point out, these continue to be guaranteed by FHA/VA. John, I don't know if you have any comments about FHA and VA.

John G. Stumpf

Yes. We've not seen any change in how they handle their guarantees and their situations. So I have nothing to report on that.

Brian Foran - Nomura Securities Co. Ltd., Research Division

Fair enough and a separate question. I guess ambitions in capital markets and retail brokerage and specifically, a lot of things are coming to market as other banks are forced to deleverage and as some of the wholesale business models come under pressure. How do you think about the trade-off between organic growth in those areas versus any pockets where acquisitions might make more sense?

John G. Stumpf

As I mentioned in either my formal comments or just made a few minutes ago, we're taking tiers. We're taking lots of tiers and our use of capital on the acquisition side will be for businesses that are bolt on to existing areas of expertise that we have and you've seen that recently, where we did a couple things with Irish assets here in the U.S. It will be places where we can either add skill or scale for customers. And it will, and think of things starting with customers. That's kind of who we are. So, and if we do, like I mentioned, if we do some things, it will be done right, the right price, it will be compelling for our stockholders. If we can't find those things, we won't do them. So it's really that simple.

Operator

Our next question comes from the line of Chris Mutascio with Stifel, Nicolaus.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Tim, I had a quick question, just follow up on the securities portfolio. I mean, I know you said that you bought throughout the quarter but there's still a pretty big difference between the end of period balances and the average balances for the available for sale. Should I suspect to see the average balances on the available for sale to catch up to the end of period balances in the first quarter? It's about a $20 billion difference between the 2 right now.

Timothy J. Sloan

Chris, that may be the case. Again, it take some time. When you look at the quarterly numbers, you can get a little bit of distortion. But yes, I think that it's more likely that they'll catch up than not.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And similar to that, on the trading side, your trading assets on an end of period basis were roughly, what, $77 billion or so and even running in more in the mid-50s. Is that $77 billion a decent run rate going forward in 2012 or that line item?

Timothy J. Sloan

Yes, I don't think so. I think -- it's a good question though. The primary driver for the increase was that we had some conforming mortgage production, agency conforming mortgage production that we decided to hold over through the end of the year because we thought we could get a better execution in the first part of 2012. Because the production had already been securitized just by accounting definitions, it had to be classified as a trading asset. We've now -- and it was about $20 billion as you point out. About $19 billion of that $20 billion is already settled and we'll settle the remaining one sometime this week. So I would not look at that increase in the $77 billion as the run rate in the future.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

So there's no economic gain in the first quarter with the $19 billion removal from trading assets?

Timothy J. Sloan

There was just a modest positive impact in the fourth quarter. There will be a gain in the first quarter but it's not significant to the company. We just thought we could get a better execution.

Operator

Our next question comes from the line of Mike Mayo with CLSA.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

First question on loan utilization and commercial and industrial loans. Has that picked up or is this really acquisitions and market share gains?

John G. Stumpf

It's acquisitions and market share gain. We've seen nothing really -- just very, very modest. It didn't account for much.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

So this commercial loan growth that we're seeing in the industry, why are we seeing it if there's not that natural demand?

John G. Stumpf

Well, first of all, there's fewer players that are sharing it. And we have more people on the street and an offering that includes not only loans but other things that help customers succeed, so. And we're not capital constrained. At least we have that escape for us.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And you didn't mention Europe, to the extent that there's opportunities there?

John G. Stumpf

You mean to buy in Europe or to buy...

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Market share gains.

John G. Stumpf

Well, we're -- 98% of our revenues come from the United States, 98% of our people are here. We're really focused on -- there's so much growth and so much opportunity here. I mean, I wouldn't rule out -- I never say never in anything. But I can tell you, we are really focused on serving our domestic customers now that we have Wachovia integrated. And surely we help individuals and companies as they do business overseas and vice versa. But our focus is really, our primary focus I should put it that way, is domestic.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

So how does the European crisis impact you if at all? Is it a nonevent or you -- how could impact you?

John G. Stumpf

Well, it impacts us as foreign banks, especially European banks, are trying to solve for their capital requirements. And they are, as you've seen, offering assets and businesses for sale. And we have -- we have been successful in some of those. And our direct exposure to the 5 most challenged countries, the sovereign exposure is next to nil and our overall exposure is also very small. So we don't have a lot of direct exposure to the troubled countries of Europe. But surely, if Europe's challenges worsen and I'm not going to expect that, but if they do worsen, that would have an impact on the overall U.S. economy or could have an impact and then we could get impacted but our exposure is quite indirect, if you will.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Then, last question, on your expense plan. When you talk about it, you talk about getting rid of your merger expenses and a lower comp and benefits and it doesn't sound so structural. It sounds kind of cyclical. Just the way you talk about it, I know you said there's some technology in consumer lending. Can you just explain in more general terms, why do you have these extra expense savings, I guess you're looking to go from, what, $12.5 billion down to $11 billion by the fourth quarter of this year. Is this all just a cycle or is there something more fundamental happening?

Timothy J. Sloan

Well, I think there's something more fundamental that's happening. The progress that we're making is being masked by some of the items that we've been very specific to call out. But as we mentioned on Slide 12, we've reorganized and consolidated our consumer lending businesses. There will be a lot of savings related to that. We're combining many of our staff functions and technology groups and we can do that now that we're almost done with the merger. We do believe that there's some cyclically high mortgage costs that are going to roll off. So it's a combination of a lot of different things but it is a result of a lot of hard work and effort on the part of the team.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Should we characterize this as a second look at expenses now that the merger integration is complete? Just as a second look at the old Wachovia First Union merger? Is there -- how would you describe it?

Timothy J. Sloan

Well, I would describe it as being more reflective of what's going on from an economic standpoint, from a regulatory standpoint. We made a lot of really thoughtful decisions about how we were going to be organized in a different environment in the first quarter of 2009. And we've made a lot of success. We've had a lot of success in integrating the platform. As you recall, about a year ago, we've stepped back and said, "Well, how do we want the company to look going forward?" And we're making some changes reflective of what's going on in the environment right now. I think it's really important that we continue to improve. This isn't just about reducing expenses this year and hoping for the best. It's about a focus on providing more value to our customers. That's the primary driver of our expense initiatives, how can we drive more value to our customers and be more efficient.

Operator

The next question comes from the line of Marty Mosby with Guggenheim.

Marty Mosby - Guggenheim Securities, LLC, Research Division

I wanted to ask you a couple of questions. One is on the efficiency ratio, taking your $11 billion, which is very clear and I like the way you're putting that out there. But the business will move up and down, hopefully, revenues as we saw this quarter, starting to see some improvement. So if you look at the efficiency ratio coming into the year, we were kind of in the mid-60s, sort of 63% to 64%. As we got through the third quarter, it improved to 60%. In the fourth quarter, it ticked up about 1%. If I take the $11 billion and just kind of put it on the income statement, it actually brings our efficiency ratio down below 55%. Is that kind of the goal we're looking at? I was just trying to equate it, so we can move from just the $11 billion into somewhat of an efficiency target as well.

Timothy J. Sloan

Yes. Marty, it's a fair question. But candidly, we have not set a specific efficiency goal. We set a run rate. So the efficiency is going to be whatever it's going to be based upon where our revenues are going to be in the fourth quarter. But clearly, we think that a 60% rate is too high.

Marty Mosby - Guggenheim Securities, LLC, Research Division

And so the seasonality of the revenues this quarter, given the mortgage always has a strong fourth quarter hasn't really over -- I did say I want to make sure we weren't overemphasizing that number to get down to 53%, something like that would be doable given the assumptions we have.

Timothy J. Sloan

Yes. Marty, I don't know if 53% or 54% is doable. I think historically, if you look at the company, we've been down in that range. The company's changed a little bit. But again, we haven't set a specific efficiency goal target. We're focused on that $11 billion.

Marty Mosby - Guggenheim Securities, LLC, Research Division

And I have one other question that I wanted to kind of see if you can walk through in the sense of the mortgage putbacks. It's really kind of a 3-layered question. I hate to throw this at you. But one is, are the primary reasons for the deficiencies, can you kind of highlight why, we're dealing with agencies, which was a very regulated process, we're still seeing that they can throw back at us these deficient loans or the delinquent loans because of paperwork and deficiency in the process. Have those issues changed at all, so did you see a year ago different issues than we're seeing today or are they about the same? And then lastly, what would be your guess in the sense of what percent of the originations we did? To me, this is the critical assumption. I would have the deficiencies that are out there. So if we take a sample of a 1,000 loans, where we see that the deficiencies have been getting back to us with a 30% or the 40% of the loans. What's kind of the range that you think the loans that we're originating would have in the sense of deficiencies?

Timothy J. Sloan

So a lot of questions there Marty, which I appreciate. That's okay, it's okay. I think that when you think about the kind of the context of the repurchase demands that we're seeing, there isn't anything really new. I think that what we've seen is a steady review by Freddie Mac and then Fannie Mae during this year accelerated its view. But the issues are really not that different. And from our perspective, as we look at our portfolio, it has much more to do with vintage than anything. And we're slowly but surely kind of working our way through the vintages. The repurchases was pretty flat. Our losses were down for the quarter. In terms of the answer to your bigger question, what I'd like to do on that one, Marty, is just punt and have our IR folks get with our mortgage folks and get back to you because they're going to provide you with a better answer than I'm going to.

John G. Stumpf

I just think that percentage if we could look at some sample size, would give us some subset that we're dealing with, that kind of puts an upper bound which in my mind, we have to be approaching after the agencies have gone through 2 and 3 years of looking at this stuff. Unless they're coming up with new stuff, eventually they're going to run out. And it seems like we're, at some point, you're going to approach that number.

Timothy J. Sloan

I look forward to getting to that point too.

John G. Stumpf

Marty, the biggest thing in 2006 to '08 was stated income. I mean, that was -- and of course, that's all changed since 2008, so. But we'll get back to you on that.

Operator

Our next question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

I just wanted to kind of ask about the mortgage bank. You had obviously great revenue numbers this quarter particularly on the production side and great production numbers for this quarter. Usually, that tends to follow through it to good revenues in Q4. Can you talk a little bit about the margin on production and anything else that might be impacting the mortgage bank as we look at first quarter?

Timothy J. Sloan

Yes. I think that the margin was up from the third quarter. It was up to 190 basis points from about 134 in the third quarter. And that's something that you see typically in periods of increased demand. And as we've mentioned, we've taken share so that's good. I don't know where the margin is going to be in the first quarter. Clearly, 190 is very attractive. We hope that it continues to be in that range. It might. It might not.

John G. Stumpf

Just as a comment about the Mortgage business, we like the Mortgage business. We like that business. And we have a -- we've been taking share in that business. For 2/3 of Americans, it's the most significant financial asset they'll have. If you're going to be in the consumer business, we believe you have to be good at the mortgage business and it's a balanced business. So again, I can't predict where volumes and originations are going to go. But we believe this is a strong business for our company and we like it.

Operator

Your next question comes from the line of Nancy Bush with NAB Research.

Nancy A. Bush - NAB Research, LLC, Research Division

A couple of questions on the investment bank. The market share gains that you're seeing in the investment bank, can you just -- I mean is that due to any one particular activity or segment? If you could just give us a little color about that.

Timothy J. Sloan

No, it's not, Nancy. I think it's just reflective of the fact that it's a different competitive environment, number one. Number two, we have many more relationships than we had a few years ago. And we've got a great team and so they're out providing advice and service to those relationships but it was really pretty broad based. It's not for one specific product or trading activity or industry. It's really reflective of the fact that when we think this is a good business for us and we think we can continue to grow it, but we're going to grow it in our way that's very focused on risk and very focused on providing the right product and service to the client.

John G. Stumpf

It's mostly about us doing more with existing customers. We've already had a relationship. We already lent them money. We already did something with them. And now, because we have 15,000 brokers that are able to help sell a debt issuance or an equity offering. As Tim mentioned, we have great folks who play team ball.

Nancy A. Bush - NAB Research, LLC, Research Division

My add-on, my second question will be just an add-on to that. I mean you guys clearly have benefited in quarters like this quarter from not being identified as a capital market/investment banking company. And I guess my question would be, how big a market share do you actually ever want to have or how big do you want the investment bank to be in relation to the rest of the company to continue that premium, I think, you're getting for not being identified as an investment bank?

John G. Stumpf

So, Nancy, here's how I think about that. I think, first of all, we love the capability of our people and -- but we think of investment banking or capital markets as another product, another arrow we have in our quivers. We sit down with medium-sized companies and large companies. This is a product and a service that we have that we believe can help them succeed financially. If they choose us for that, that's terrific. If they choose us to do their stock transfer business or treasury management instead of that, that's also terrific. I'm not driven by league tables around here. I'm driven by conference room tables. I want to see us sitting around a table helping customers. So if we grow because we're helping customers, terrific. If we don't grow because their business isn't there but we're getting paid a different way, that's also terrific. And that's where I think we are fundamentally different. We don't have a standalone Head of Corporate Finance that reports to me that has a league table goal. I could care less about that. It's a product that reports into our overall commercial business. They're very good people, they do terrific work. I can't tell you how excited I am about the kind of -- the way they play team ball and work around here.

Nancy A. Bush - NAB Research, LLC, Research Division

John, I'd like to get your perspective on one other thing as well. Jamie Dimon said a few days ago that given the stringency of this stress test, the CCAR, the 13% unemployment, et cetera, et cetera. He expected after you get the results of that and he implied that he does not think there will be capital raising needed on the part of major American banks as a result. Do you hope that, that would be the definitive word on capital? Do you expect that -- do you have that same expectation?

John G. Stumpf

Well, I don't know other banks as well as he knows other banks. So I know this company. And we surely believe we're in a good spot. But I would make a general comment. What we've been through the last 3 years in the U.S., there's been a lot of capital grown, organically and just through earnings and a lot of capital was raised. The industry is far stronger than it's been in the past. And it takes strong banks and a strong financial system to support a growing economy. This country is in a much better position than a lot of our European counterparts because of the strength of the banks. So I don't know what the stress test is going to show for each institution. I don't have a vision of that. But I know in our case, I don't worry a lot about our capital to support growth in this for us.

Operator

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

I had a couple of questions. One is on the excess liquidity that you have. Can you just give us what number you calculate that to be?

Timothy J. Sloan

We don't really calculate an excess liquidity number at the company, Betsy. I think that it ebbs and flows based upon deposit growth and the opportunities we see in terms of loan growth and acquisitions and investing the securities portfolio. So I mean, I wish I could give you a specific answer but that's not the way we think about it.

Betsy Graseck - Morgan Stanley, Research Division

Okay. So I guess, the reason I asked that question is I'm thinking about your firepower for investing in loans going forward. Do you feel like that rate of change is decelerating or accelerating?

Timothy J. Sloan

Well, I think it's about the same. As we talked about, we got a tremendous amount of deposit growth in the third quarter. We got a lot of deposit growth in the fourth quarter when you think about it, we're up $30 billion in one quarter and then turn the clock back and how that would feel 2 or 3 years ago. But we've got more than enough dry powder to take advantage of the organic growth that we're seeing from our customers, which is strong as well as look at any acquisitions. But as John said, we're going to look at a lot of acquisitions. We may make none of them, we may make a lot but we feel good about where we are from a liquidity standpoint.

Betsy Graseck - Morgan Stanley, Research Division

Can you just give us a sense of what your hurdle rates are for the kind of loans you're seeing? You mentioned earlier on the call that you've been seeing a lot of opportunities, you're being selective. Can you just give us a sense as to whether or not your hurdle rates have changed or what they are for the C&I loan book for example?

Timothy J. Sloan

So I'd rather not be specific about what our hurdle rates because if we're in a competitive situation, then our competitors might know what we're trying to solve for. But I can tell you, as we look at the portfolios that we purchased today, those portfolios have been higher-quality portfolios and the yields have been consistent with our existing commercial real estate portfolio. We really don't -- we don't have a specific hurdle rate that we would necessarily apply to every portfolio or every business because the risk in those businesses and portfolios can be different. You got to do it kind of deal by deal, opportunity by opportunity, just like when you underwrite a new loan that you look at the risk to that existing customer. And also, Betsy, we bring other things. We bring, when we do sit down with a potential seller, we also want to get paid for the trust these folks have in us that we'll complete the deal, and that we have the capacity to complete the deal. We don't re-trade it. So these are all, these all add into the mix. And in some cases, we're not even the highest bidder when we get deals.

Betsy Graseck - Morgan Stanley, Research Division

Sure, okay. And then lastly on C&I, the average is up nicely around 4% to 4.5%, 4.6%. Q-on-Q, the end of period was up a little bit less, just under 2%. So I guess -- and that's in an environment based on the HA data that were showing accelerating C&I EOP into the end of the quarter. So did you see competition kind of heating up and you're backing off? Or opportunity just wasn't just as great? Can you just explain why the EOPs are different?

Timothy J. Sloan

Yes. I think the important thing is to appreciate that you shouldn't get too focused on what happens quarter-to-quarter because you can have a lot of the activity that happens over the quarter. I would not be concerned about our ability to grow commercial loans at all.

Betsy Graseck - Morgan Stanley, Research Division

Was there originally a pullback a little bit relative to what we saw from the HA? Was it a function of the competition that you see?

Timothy J. Sloan

No, no, no. We didn't necessarily pull back. A lot of it can just be timing. I mean we have a bunch of loans that and transactions you're working on that could, you think might close toward the end of the year and they don't. They close in the first part of the next year or the next quarter.

John G. Stumpf

And there's also some seasonality here also.

Betsy Graseck - Morgan Stanley, Research Division

So your average growth rates are better for forecast than you think than EOP?

Timothy J. Sloan

Yes.

Operator

Our next question comes from the line of Fred Cannon with KBW.

Frederick Cannon - Keefe, Bruyette, & Woods, Inc., Research Division

Most of my questions have been answered but I just want to follow-up on the last one about loan growth. If I look at your end of period loans and exclude the $5.6 billion in reclassifications and then the $3.6 billion in purchased average bank loans, I have the quarter-on-quarter loan balances essentially flat, which suggests that your organic growth is essentially offsetting your portfolio, your run-off portfolio decline. Is that a fair way to think about where you are right now? Or is that understating what's going on?

Timothy J. Sloan

No. I think it understates what's going on. I think the important thing from our perspective, Fred, is that we've got the ability to grow loans in various loan types, as well as make acquisitions. And depending upon the timing in the quarter or any given quarter, some might be growing faster than others. And I really think you've got to think about it as a total of all of them. And I wouldn't look at loan growth that we had from acquisition as being a bad thing. That's just part of the opportunities that we have to grow.

John G. Stumpf

And only a couple of billion of it showed up in the fourth quarter, so you can't look at all of the purchase. Some of that was on the third quarter. So there was actual growth in the fourth quarter.

Frederick Cannon - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. Just one more, Tim. Just looking at the yield on the security, you probably already covered this. The yield on the security portfolio has come down fairly significantly over the last year and even in the quarter-on-quarter. Is that just inherent in the flat yield curve environment? And just in terms of the opportunities to invest in securities, inherently lower yielding is just what you face right now?

Timothy J. Sloan

Yes, yes. I think that's right. I mean, I think that the rate of decline is slowing just a little bit but that's a very fair characterization, which again is why we're focusing on net interest income as opposed to just the yield.

Operator

Your final question will come from the line of Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

Just one last follow-up on the drivers to the growth on the C&I side. Do you have any color on kind of the relative strength of the different segments, be it kind of large corporate or syndicated middle markets, small business and just as, is there any one area where you're seeing better opportunities to take share?

John G. Stumpf

Well, it's more on the type of business as opposed to the size. If you look at anybody or any company involved in the commodities, they're doing quite well and because commodity prices are up, there's lending opportunities there. Agriculture is pretty good, energy is pretty good. So if you -- and manufacturing actually is doing quite well. On the other side, if it's around residential real estate, not so good. So it depends more on that than on size.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay. And any comments just broadly on how pricing's holding in?

Timothy J. Sloan

Pricing continues to be, to hold in pretty well during the quarter.

John G. Stumpf

And think of our pricing. We price at the relationship level. So it's not only the price on the loan, it's the price on the treasury business, the 401(k) business, the stock transfer business and a whole bunch of other things. So we think it's probably differently than a lot of other companies.

John G. Stumpf

And thank you all for joining us. Again, we were proud of what our team did in the fourth quarter of 2011 and we're excited about 2012. Talk to you next quarter.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you, all, for participating and you may now disconnect.

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